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Heterogeneous consumers and public spending shocks

11th National Competition for Economic Research Grants

International economics

Senior Researcher : Luca Gambetti

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Research Centre or Institution : Consorcio Markets, Organizations and Votes in Economics. Barcelona


The major variations in public spending in recent years in most industrialised countries have attracted renewed interest in the effects of public spending on the private component of aggregate demand, and on the efficacy of fiscal policies as an instrument for stabilisation. However, economists still disagree about its effects on consumption. Some studies show that consumption increases as a result of an increase in public spending, while in others it falls. Most of these analyses, however, have focussed on aggregated consumption. From the theoretical point of view, various studies suggest that different consumers may respond to fiscal policies in very different ways. So, probably, the question of whether consumption increases or decreases after a change in public spending is the wrong one. The correct question should be: In which part of the distribution of consumption does consumption increase, and where does it decrease?

This project has two objectives: on the one hand, to study and empirically characterise the behaviour of the consumption distribution over the course of the economic cycle; and, on the other hand, to study the effects of changes in public spending on the distribution of consumption. The evidence may provide relevant information for those responsible for economic policy about the correct measures to be taken in order to influence the consumption of different individuals. In addition, different, important empirical guidelines could be suggested for researchers interested in constructing theoretical models with heterogeneous agents.

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